Mexco Energy Corporation — Form 10-Q Summary
Business context and period: Mexco Energy and its subsidiaries explore, develop, and produce oil, natural gas, condensate, and NGLs, mainly in the Permian Basin, with properties in 13 states. This report covers the three months ended June 30, 2018, the first quarter of fiscal 2019; financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended June 30, 2018 | Comparable 2017 period / change |
|---|---|---|
| Total operating revenue | $749,011 | $667,684; up 12.2% |
| Oil and gas revenue | $735,353 | $651,442; up 12.9% |
| Operating income (loss) | $21,328 | $(268,345) |
| Net income (loss) | $14,420; $0.01 per share | $(295,552); $(0.15) per share |
| Operating cash flow | $154,501 | $211,849 |
| Capital additions to oil and gas properties | $29,042 | $200,062 |
| Cash at quarter-end | $435,092 | $492,610 at March 31, 2018 |
| Long-term debt | $500,000 | $700,000 at March 31, 2018 |
Total operating expenses fell to $727,683 from $936,029. Operating margin was approximately 2.8%, compared with a negative margin in the prior-year quarter. No income tax expense was recorded. Working capital was $964,653, up $39,035 from March 31, 2018; current assets were $1,097,876 and current liabilities $133,223. Total assets were $9,904,276 and stockholders’ equity was $8,419,448. The company repaid $200,000 of its bank line; net cash declined $57,518.
Material changes and operating drivers
- Oil revenue rose 34.6% to $570,063 as average price increased 36.3% to $60.73 per barrel; oil volume edged down 1.2% to 9,387 barrels.
- Gas revenue declined 27.5% to $165,290 as volume fell 18.4% to 73,374 Mcf and average price fell 11.4% to $2.25 per Mcf.
- Production expense decreased 16% to $258,935; management attributed much of the prior-year comparison to an approximately $67,000 refund of marketing and transportation fees that XTO Energy incorrectly provided in that quarter.
- DD&A fell 31% to $216,075, and general and administrative expense declined 19% to $249,038. Interest expense decreased 75% to $6,921, reflecting lower borrowings partly offset by higher rates.
Outlook, liquidity, risks, and other matters
- Mexco expects to participate in approximately 50 horizontal wells during fiscal 2019 at an estimated aggregate cost of approximately $1.3 million. It participated in drilling eight Delaware Basin wells in the quarter at an aggregate cost of approximately $142,000 and spent a further $192,600 in July to complete five wells. Funding is expected, to the extent possible, from cash, operating cash flow, and sales of non-core properties.
- The Bank of America facility had a $500,000 outstanding balance, a $750,000 borrowing base at June 30, and no availability at that date. The borrowing base was reset to $525,000 on July 31. The facility matures November 30, 2020, bears interest at floating BBA LIBOR plus 3 percentage points (5.10% at June 30), and is secured by subsidiary stock and substantially all oil and gas properties. Mexco reported covenant compliance and expected to remain compliant over the next fiscal year. Cash dividends are prohibited by the agreement.
- Management says it is applying financial discipline amid commodity-price uncertainty and may continue selling non-core assets. Permian pipeline capacity constraints have adversely affected prices; management could not predict how long they would last. Price declines could reduce cash flow, reserves, borrowing capacity, and financing access, and could trigger a full-cost accounting impairment.
- At June 30, one $50,000 letter of credit supported an operating-well plugging bond; it was subsequently renewed at an amended amount of $25,000. Contractual obligations included $500,000 of line-of-credit principal due in the one-to-three-year period and $142,791 of lease payments. No principal payments were anticipated before maturity.
- One purchaser represented $192,053, or 45%, of oil and gas receivables. A one-percentage-point change in the borrowing rate would change annual pretax income by approximately $5,000; management estimated quarterly pretax sensitivity of $93,870 to a $10-per-barrel oil-price change and $73,374 to a $1-per-Mcf gas-price change.
- A $1,238,530 deferred tax asset was fully offset by a valuation allowance; management believed it was more likely than not that the asset would not be realized. Adoption of revenue-recognition Topic 606 had no reported effect. Management reported effective disclosure controls and no material changes in internal control. No material change to previously disclosed risk factors or significant legal proceedings was reported.
Important facts for investors to verify
- Whether the planned $1.3 million well-participation program can be funded while maintaining liquidity and covenant compliance, particularly given no unused facility availability at June 30.
- How Permian pipeline constraints, commodity prices, and production trends affect realized prices, revenues, reserves, and borrowing-base reviews.
- The company’s exposure to its largest purchaser and the collectability and timing of oil and gas receivables.
- The recoverability of the fully reserved deferred tax asset and the assumptions behind reserve and full-cost impairment estimates.
- The filing contains inconsistent retained-earnings figures: the balance sheet reports $429,853 at March 31, while the equity statement reports $429,483 at April 1. The ARO rollforward also differs slightly from the balance-sheet figures; investors may wish to check the filed statements for the intended amounts.